Public Trade Also in Deficit Quagmire... Emergency for South Korea's Growth Engine

Cumulative Trade Deficit Hits $24.8 Billion This Year... Record High
Trade Deficit with China at $380 Million... Four Consecutive Months
Semiconductors Also Contract for First Time in 26 Months... Concerns Over 'Structural Deficit'

President Yoon Suk-yeol Receiving a Report on the Development Plan of Busan New Port
(Changwon=Yonhap News) Reporter Seo Myeong-gon = On August 31, President Yoon Suk-yeol received a report on the development plan of Busan New Port and the current status of global logistics congestion response at Hanjin Terminal in Jinhae-gu, Changwon-si, Gyeongnam, at Busan New Port before attending the Emergency Economic and Livelihood Meeting. 2022.8.31
Photo by Seo Myeong-gon
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[Asia Economy Sejong=Reporter Lee Jun-hyung] The main reason behind the unusual 'deficit streak' in the trade balance is the soaring energy prices since the beginning of this year. Additionally, China's 'technological rise' has lowered South Korea's export competitiveness to China, and the semiconductor exports, which have shown abnormal signs, have also contributed to the 'record-breaking' trade deficit.

According to the Ministry of Trade, Industry and Energy on the 1st, the cumulative trade deficit from January to August this year amounted to approximately 24.8 billion dollars. This is the largest deficit in 66 years since trade statistics began in 1956. The trade balance has recorded a steady deficit for five consecutive months from April to last month. In fact, last month's trade deficit reached 9.47 billion dollars, setting a new monthly record. If this trend continues, the annual trade deficit could surpass 30 billion dollars for the first time in history.

Trade Deficit with China Continues... First Time in 30 Years Since Establishment of Korea-China Diplomatic Relations

Among the indicators announced that day, experts are most concerned about the 'trade deficit with China.' This is because trade with China, which had served as South Korea's 'dollar box,' is deteriorating. Last month, the trade balance with China recorded a deficit of 38 million dollars. This marks the fourth consecutive month of deficit following May (-1.09 billion dollars), June (-1.22 billion dollars), and July (-600 million dollars).

Exports to China last month were 13.13 billion dollars, down 5.4% compared to the same month last year. This decline was influenced by China's 'Zero COVID' policy, which involved lockdowns in major cities, leading to decreased exports of key items such as semiconductors (-3.4%) and petrochemicals (10.9%). A Ministry of Trade, Industry and Energy official explained, "Exports to China increased for some items such as steel and petroleum products," but added, "(However) China's domestic demand and production have slowed, and imports from China, mainly intermediate goods such as semiconductors and fine chemical raw materials, have increased, resulting in a deficit."

The problem is that the trade deficit with China is unlikely to be temporary. China is rapidly closing the technological gap with advanced countries, which is gradually lowering South Korea's export competitiveness to China. China's strong push for a domestic market-centered policy is also one of the factors narrowing South Korea's export position. Kim Jung-sik, Emeritus Professor of Economics at Yonsei University, said, "As the technological gap between South Korea and China narrows, exports to China have become more challenging than before," adding, "(The trade deficit with China) is also influenced by China's economic slowdown and is likely to continue for the time being."

Exports of automobiles to China clearly reflect this phenomenon. According to the Federation of Korean Industries, exports of automobile parts to China decreased by more than half from 4 billion dollars in 2010 to 1.8 billion dollars last year. Hyundai Motor's sales volume in the Chinese market also shrank from 1.14 million units in 2016 to 350,000 units last year. Hyundai's market share in China this year remains at the 1% level.

Even Semiconductors Are Sluggish... Concerns Over 'Structural Deficit'

To make matters worse, semiconductor exports, which have driven trade surpluses, are also showing poor performance. Last month, semiconductor exports amounted to 10.78 billion dollars, down 7.8% compared to the same period last year. This marks negative growth for the first time in 26 months since June 2020 (-0.03%). The government diagnoses that factors such as reduced market purchasing power due to inflation and the declining prices of DRAM and NAND flash have adversely affected semiconductor exports.

Given this situation, concerns are growing that South Korea's trade, a pillar of its economy, may fall into a structural deficit. The Bank of Korea stated in a report on the 31st of last month, "Recent trade deficits need to be examined not only in terms of raw material prices and global economic recession but also from the perspective of changes in domestic export-import structures," analyzing that "In terms of export structure, the decline continues due to intensified competition with China, and in terms of import structure, imports of intermediate goods are increasing." It added, "In the second half of this year, with international oil prices remaining high and the impact of global economic slowdown becoming more pronounced, the trade deficit trend is expected to continue," and warned, "Considering uncertainties in the trade environment such as US-China conflicts, the situation could worsen more than expected."

This content was produced with the assistance of AI translation services.